The Sales Tax Act, 1990 seems to be a prescription of a doctor (Central Board of Revenue) whereby around 90% sections of the first six chapters contains the word "as may be prescribed" while around 70% section in the whole ordinance contains similar wording.
This wording is the core reason of inherent 2Cs, that is, Complexity and corruption.
In furtherance, due to this wording, the SROs, circulars, notifications and general orders attached to this piece of legislation not only makes it a discretionary rule based law but has also made it massive un-cross referenced body of law which should be read in conjunction with decided cases of honourable courts of justice.
I am not convinced with Albert Einstein, who said, "The hardest thing in the world is to understand Income Tax", probably, he hasn't gone through the Sales Tax Act, 1990 of Pakistan.
This article is an endeavour to highlight such problems, concluding on section 73 and suggest some corrective measures, apart from suggesting some principles to be incorporated for avoiding the 2Cs.
RULE BASED VERSES PRINCIPLE BASED: The Sales Tax Act, 1990 is a rule based law, in its present state, dependent upon the short-term economic goals and operational decision-making by middle management of economics (Central Board of Revenue) in the shape of SRO, notifications, general orders and circulars.
This current state of law makes the business environment uncertain/unpredictable and any long-term budgeting may prove to be a futile exercise subject to revisions on issuance of any of the aforementioned statutory instruments by the middle economic managers.
One wonders on what ground realities, the Central Board of Revenue is not allowing genuine inputs.
Almost every day, a news item appears in the Press that the Central Board of Revenue has allowed the input of a material.
One may ask why it was not allowed in the past and now what ground realities has taken a U-turn, which compelled the officials to allow the input.
There may be only three bases; firstly, no one, in the past, enlightened the minds of the high-ups of the Central Board of Revenue, based on the presumption that they, themselves, have no such expertise to grasp/understand/realise the ground realities of that sector of business, secondly to meet the yearly revenue targets and thirdly corruption.
Readers will appreciate the fact that the difference between a terrorist and tax official is that you can negotiate with a tax official. Playing with the negative and positive lists under the garb of as may be prescribed is a game started since the birth of the Sales Tax Act, 1990.
This wording is the root cause of the provision of hundreds of arms and legs for the tax officials necessary for the fulfilment of all the purposes.
The Central Board of Revenue is not merely playing with the negative and positive lists but also busy in beating the spirit of judgments of honourable courts and the decision of high court in relation to fixed asset is no exception.
In this regard, the Central Board of Revenue has suggested an amendment in clause 33 of section 2 by omitting the words "in furtherance of business" in contrast to the successful pleading by the Inland Revenue of UK for defining the word business.
In UK, the term business has been widely construed by the courts to include "any occupation or function actively pursued with reasonable continuity, regardless of profit motive, unless it is carried on solely for pleasure and social enjoyment".
Such principle-based definitions provide certainty for business and also for the revenue authority. Apart from this, in order to convert this rule base law into a principle based law, Central Board of Revenue must incorporate the principles related to end consumer, accounting methods and time period.
The most important aspect is that when a business is to be treated as end consumer for not allowing the input.
Normally the business profit and loss account's upper portion appears as follows.

==========================
Revenue                 XX
Cost of services/     (XX)
goods sold
Gross profit            XX
Other income            XX
Expenses              (XX)
Net profit before tax   XX
==========================

This portion reveals the fact that business is not an end consumer. Whatsoever, goods are purchased and expenses are incurred are for the sole purpose of in furtherance of business activity.
Hence, it can be concluded that all the inputs related to the purchases of direct materials and consumables and direct/indirect expense incurred need to be allowed except entertainment and conveyance, where vehicle is not used wholly for business purposes.
Now let's move on to the accounting methods specified in Sales Tax Act, 1990. Currently there are effectively eight schemes for four categories of taxpayers, that is, three for manufacturer and three for retailer and one for wholesaler/Importer. This can be summarised as follows.

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Turnover during last 12 months            Tax Rate
Importer                                       15%
Manufacturer
Turnover up to Rs 500,000.00                     -
Turnover exceeds Rs 500,000.00 but
 Less than Rs 2,500,000  2%      [some exceptions]
Turnover < Rs 2,500,000                        15%
Wholesaler                                     15%
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RETAILER
--------------------------------------------------
Turnover up to Rs 1,000,000.00                   -
Turnover exceeds Rs 1,000,000.00 but
 Less than Rs 20,000,000      2% [some exceptions]
Turnover < Rs 20,000,000                       15%
==================================================

Following are two suggested accounting schemes for business within the ambit of 15% and business within the ambit of 2%.
Registered persons, falling within the ambit of 15%, should not be required to account for sales tax by reference to tax periods.
The Central Board of Revenue should allow the registered person to pay sales tax on quarterly basis, although, the Central Board of Revenue may allow the registered person to elect for a period of one month to take the advantage of early refunds.
In furtherance, listed companies should be allowed to pay the sales tax on advance basis, if they opt for a quarterly return basis.
The payment should be based on previous year's sales tax liability and each payment may be 1/18th of the annual figure.
The payment accounted for can be taken into account on the quarterly sales tax return basis.
This will harmonise the Sales Tax Act, 1990 with Companies' Ordinance, 1984, remove the tendency of unnecessary revision due to tight schedule and reduce the accounting pressure.
In furtherance, the following two new schemes may be announced for other than listed companies.
The Central Board of Revenue may adopt them to provide ease and catering new taxpayers. The two schemes are cash accounting scheme and annual accounting scheme.
The cash accounting scheme will allow the registered person to account for sales tax on the basis when payment is received from the customers or when payments are made to suppliers.
Thus the tax point becomes the time of receipt or payment. A registered person may leave the scheme if the annual turnover exceeds the limit.
A major advantage of cash accounting scheme is that automatic bad debt relief is available as output sales tax is only accounted for if and when payment is received.
For anti-avoidance measure, the cash accounting scheme cannot be used for goods that are invoiced more than six months in advance of the payment date or when an invoice is issued prior to the supply actually taking place.
This measure will prevent the creation of an early input GST claim for the customer, long before supplier has to account for the output GST.
The annual accounting scheme may allow a registered person to prepare a GST return just once each year.
This yearly GST period must coincide with the business' financial year. The annual GST return must be submitted within three months after the end of the annual GST period.
Although registered persons will be required to make nine payments on account during the month starting from the 4th month, may be October if the year starts in July, to the 12th month of annual GST period and any balancing payment is made at the time that the return is submitted.
Each GST payment on account may represent 10% of the previous year's sales tax liability.
As far as registered person, falling within the ambit of 2%, is concerned, any flat rate scheme need to be aimed at harmonising the theme of flat rate, that is, simplifying the way in which the small businesses calculate their GST liability and reducing the administrative burden on small business by allowing them to apply a flat rate of 2% GST to their total turnover.
It is worthwhile here to note that across the Europe, business using flat rate scheme, similar to 2% in Pakistan under Sales Tax Act, 1990, will not be required to record the details of invoices issued or purchase invoices received to calculate their VAT, instead they present them as it is.
How could the Central Board of Revenue high ups require our Pakistani registered person to record the same! The Central Board of Revenue should amend section 3A along with rule 5 of turnover tax rules and 3AA along with rule 5 of retail tax rules and do not try to make it an ego problem!
In furtherance, the tax return filing date should be stretched to 30 days which is currently 15th of subsequent month, owing to the practical difficulties to finalise the return within short span of time. Now let's move on to Section 73 of Sales Tax Act, 1990.
SECTION 73: In the past, the Central Board of Revenue tried to portray a picture of business community being corrupt and involved in the flying invoice game while the other side of the picture is that the Central Board of Revenue subordinates are not well trained, well equipped and lack professional training.
This is the basics of what was hidden in the garb of section 73.
The actual notion is quite different from what was portrayed by Central Board of Revenue in the past.
The actual notion is that the Central Board of Revenue fails to incorporate the concept of bad debt and instead tried to restrict the freedom to do business.
Following is a suggestive section 73, subject to discussion between business community and Central Board of Revenues' high ups.
1) Where a registered person, being buyer, customer, purchaser or by whatsoever name called, does not make any payment exceeding Rs 50,000, either singly or in aggregate to the registered person, being supplier, purchaser or by whatsoever name called, excluding payment on account of utility bills, through proper banking channel, the payment shall be deemed to be an inadmissible payment for all purposes of this ordinance;
EXPLANATION: The term proper banking channel means and includes crossed cheque, pay-order, standing instructions, individual instruction for such transaction or through any other banking instrument showing the transfer of the payment in favour of the registered person, being seller, and name of the registered person, being customer, buyer, purchaser or by whatsoever name called, in case of pay order issued by a bank not normally used by he/she/it.
2) Where a registered person, being buyer, customer, purchaser or by whatsoever name called, does not pay the amount payable in respect of the goods invoiced and supplied to him/her/it during the fifth tax period after such supply, the input so claimed shall immediately be reversed in such fifth tax period's return, except where the supply was under a written contract which provides for a longer period and the payment term annexure of that contract was submitted to the collector during the tax period of contract;
3) Where any amount is reversed due to the application of sub-section (2), the collector shall collect the information in respect of that registered person, being supplier, seller or by whatsoever name called, name, address, sales tax registration number and NTN and convey the information to the relevant Collector of Sales Tax for reversal of such output in the respective tax return of that registered person, being supplier, seller or by whatsoever name called;
4) Where a registered person, being supplier, seller or by whatsoever name called, claims a bad debt in respect of goods invoiced and supplied by him/her/it during the fifth tax period's return after such supply and notify the related registered person, being buyer, customer, purchaser or by whatsoever name called, the collector shall collect the information in respect of that registered person's, being the customer, name, address, sales tax registration number and NTN and convey the information to the relevant collector of Sales Tax for reversal of such input in the respective tax return of that registered person, being buyer, customer, purchaser or by whatsoever name called.
The Central Board of Revenue should try to understand the ground realities of the environment in which the businesses operate in Pakistan.
In furtherance, the literacy rate should be a key factor and comparison of the provision of developed countries may bring developed experience.
The Central Board of Revenue must start the exercise of converting this rule-based law into a principle-based law.
In furtherance, the return filing date need to be stretched to 30 days, apart from the introduction of new schemes for various categories of taxpayers, which may include the schemes suggested in this article.
Section 73 needs not to be used as an instrument to hamper the freedom to do business and the Central Board of Revenue should be ready to account for the effect of both aspects of the transactions of GST.
The suggestive measures will remove the 2Cs from the Sales Tax Act, 1990, that is corruption and complexity, and will run the Central Board of Revenue towards the path of improved image, which cannot only be achieved through Income Tax Ordinance, 2001.